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Iran’s Currency Markets in Surprise Downward Turn

October 8, 2018
Behrouz Mina
8 min read
Some say the foreign exchange market has responded positively to Zarif's and Rouhani's performances at the UN General Assembly, but no one really understands the reason for the recent market shifts
Some say the foreign exchange market has responded positively to Zarif's and Rouhani's performances at the UN General Assembly, but no one really understands the reason for the recent market shifts

After weeks of continuously falling, the Iranian rial (IRR) surprised everyone in early October as it rallied against foreign currencies in Iran’s free market. 

If the plummeting rial was bewildering, its rise has been just as puzzling. Some people credit the Central Bank of Iran for the shift in fortunes, while others believe there was a full-scale market intervention to reverse the trends. But since the judiciary has banned live reporting on exchange rates, it is impossible for exchange dealers, analysts and ordinary Iranians to gain a true sense of what is happening on the market.

The changes began on October 1. The Iranian rial had fallen to 190,000 rials per US dollar in the previous week, and many commentators had predicted that it would continue to decline due to the United States-imposed sanctions. However, after a few days of stability, on Monday, October 1, the IRR began to gain, and the exchange rate against the dollar rose to 150,000 rials. Those who had purchased foreign currencies either as an investment or to save faced the prospect of losses they had strived to avoid. 

Not only did currency dealers go out on streets of Tehran, Ahwaz, Mashhad, Shiraz, and Tabriz, average citizens were out too, hoping to save their assets. Social media was buzzing with rumors. Even Iran’s official media agencies reported on the frenzy, including one report that said that 30 people speculating on currency fluctuations had suffered heart attacks after hearing the news about the shifts in exchange rates.  

By Thursday, October 4, the value of the dollar was falling in Tehran, while the value of the rial was gaining. The exchange rate reached 137,000 rials per dollar after improving by another 8,000 rials. The value of gold followed. Iran’s standard gold coin, known as the Bahar e Azadi, or “Spring of Liberty,” had reached 51,500,000 rials per piece; now its price declined to 44,000,000 rials, even reaching 39,000,000 rials at one point. The US dollar fell by 21 percent, and gold lost 22.3 percent of its rial value in four days. While many consider both events to be signs of an improving economy, the fact remains that the dollar and gold represent a significant share of Iranian households’ investment portfolios. Facing a market in decline, an increasing number of Iranians decided to sell their holdings. Exchange offices and dealers often refuse to bid or to buy these offerings, but the Central Bank of Iran ordered Iranian banks to purchase individual holdings. 

Iranian banks began offering a low bid on Wednesday, October 3: 95,000 Iranian rials per US dollar for holdings in dollars and 115,000 rials per euro for holdings in euros. Soon two sets of prices appeared in exchange offices across Iran. Some offered to buy foreign currencies at the banks’ rates, between 95,000 and 110,000 rials. Others kept following the free market offerings and paid a price between 130,000 rials and 140,000 rials per dollar for individual holdings. And the uncertainty and confusion have only increased. There is no universal exchange rate, and prices change widely from one trade deal to another. 


Do Not Buy, Do Not Sell and Keep Quiet

Iran does not have an official nationwide currency market. Street dealers buy notes for notes. Every currency exchange has its policies, terms and prices. And ordinary people and investors cannot trade currencies in the Tehran Stock Exchange (TSE). All of this means that it is close to impossible to record accurate exchange rates. Here there is no server, no algorithm. The human factor is the dominant factor, and each pair of buyers and sellers must agree on terms. It is not as if individuals wake up and  place an order for sale with his or her brokers or an online system. And as the US dollar fell, many dealers stopped their exchange activities anyway. 

An average Iranian currency dealer differs drastically from his counterpart in modern economies: he owns the currency he buys. So when rates are going down, he does not sell to avoid a loss. His foreign counterparts charge a commission, and they never own the currencies. In modern currency markets when rates go down trading is still possible; in Tehran, dealers are the first to halt trading because they do not want to accumulate losses. The same is true of many speculators and investors: they do not want to sell at a loss. One street dealer called Amir told IranWire: “Right now must be the best time to buy, but no one sells, and no one buys at 130,000 rials to the US dollar.” 

Even if investors have offered a greater number of foreign banknotes, the number of trade deals seems to be declining. Moreover, exchange offices are refusing to conduct any exchanges. It seems as though the demand for foreign currency has significantly decreased in the free market. Of course, in the absence of a universal marketplace, there is little actual data to support this claim. However, many dealers and analysts share the same impression: they see prices are falling, but they are not seeing or hearing that trade is on the increase.

It is an economic fact, and a Keynesian assumption, that prices resist decline, and that those who have invested in foreign currency do not want to suffer financially. Those who plan to buy are waiting to make sure the market has stabilized and the rial does not make further gains. In similar markets, people use exchange rates and their trends to decide how to trade; in Iran the markets do not record exchange rates for individual deals or trades. People have to find out the latest exchange rate from a street dealer, or from Telegram or another social media app. People limit their assessments to the number of trades they have been involved in or have witnessed. Iranian officials believe social media has inflated the exchange rate and inflamed demand. They accuse the media of purposefully disrupting Iran’s currency distribution mechanism.

Because of the judiciary's ban, the media cannot report on rates. In an effort to control the market, Iranian officials have shut down several websites and Telegram channels. The sites still remaining online, including Currency, Gold and Coin News Network of Tehran, have voluntarily halted or limited their activities, announcing that they will only report the exchange rate between 10:30 AM and 8 PM. The Currency, Gold and Coin News Network of Tehran webpage is currently providing no information about either current or past exchange rates or their trends. The pages are essentially blank. Instead, the website presents a banner that proclaims: “His Eminence Ayatollah Larijani, the esteemed head of the judiciary, in his recent remarks reminded us of some points regarding reporting prices and currency markets; these demonstrate his insightful grasp and researched perspective of this field.” 

During a meeting of judiciary officials on October 3, Ayatollah Larijani announced: “Wicked prices have impacted the market.” He left no doubt that Iran’s judiciary blames people who gave false information about currency values for the current situation. He also announced that the Attorney General of Tehran has been tasked with investigating the matter and told to summon the media managers to warn them and give them “a severe ultimatum.” 

Larijani’s also said that some people responsible “might be economic criminals and corrupt,” — a charge that could carry the death penalty. People involved in the currency market are aware that they might be trading for more than they had bargained for. The Central Bank authorities have already provided the judiciary with a list of potential suspects. And the exchange rates are not reported in compliance with the rules set by the judiciary. 


What Happened? 

Few know exactly what has happened. Official media outlets hail the Central Bank of Iran for its success in taming the market. Some say Islamic Revolutionary Guards Corps (IRGC) agents injected much-needed currency reserves to counter the decline of the national currency. Many people believe the markets are reacting positively to President Rouhani’s and Foreign Minister Zarif's negotiations in New York City, where they spent the last week of September attending the United Nations General Assembly. In Tehran, after speculation in the media that politicians were getting ready to pass legislation the recommended by the Financial Action Task Force (FATF), on October 7, parliamentarians voted for Iran to join the International Convention for the Suppression of the Financing of Terrorism.

They say that Mr. Zarif has secured guarantees from the European Union requiring their central banks supply Iran with foreign currencies. 

However, apart from the controversial bill, no one knows for sure if most of this is true. It is not clear whether the FATF is the only banking barrier between Iran and the European Union. No euros have arrived from the European Union through banking channels as yet. There is no evidence that President Rouhani and Foreign Minister Zarif have succeeded in securing reliable guarantees. The headlines are optimistic, but economic transactions need and require more than headlines. At the same time, the judiciary’s threats have silenced independent news sources and some social media networks. No one knows what is going on, and that means one thing: The currency exchange market in Iran is far from reaching a stable equilibrium.


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